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INVESTMENT MANAGEMENT COMMITTEE
December 2018
TEACHER RETIREMENT SYSTEM OF TEXAS MEETING BOARD OF TRUSTEES
AND INVESTMENT MANAGEMENT COMMITTEE
(Committee Chair and Members: Mr. Colonnetta, Chair; Mr. Corpus; Mr.
Hollingsworth; Mr. Moss and Ms. Ramirez)
All or part of the December 13, 2018, meeting of the TRS Investment Management Committee (Committee) and Board of Trustees may be held by telephone or video conference call as authorized under Sections 551.130 and 551.127 of the Texas Government Code. The Committee intends to have a quorum and the presiding officer of the meeting physically present at the following location, which will be open to the public during the open portions of the meeting: 1000 Red River, Austin, Texas 78701 in the TRS East Building, 5th Floor, Boardroom. The open portions of the meeting are being broadcast over the Internet. Access to the Internet broadcast is provided at www.trs.texas.gov.
AGENDA
December 13, 2018 – 8:30 a.m.
TRS East Building, 5th Floor, Boardroom
1. Call roll of Committee members.
2. Consider the approval of the proposed minutes of the September 2018 Committee meeting – Committee Chair.
3. CIO Update including Fleet Strategy, Upcoming Events and Report on Metrics – Jerry Albright.
4. Discuss the Third Quarter 2018 Performance Review – Steve Voss, Mike McCormick and Mike Comstock, Aon Hewitt.
5. Annual Update on the Trading Group – Bernie Bozzelli.
6. Annual Update on the Risk Group – James Nield.
7. Annual Update on the Multi-Asset Strategies Group, including an overview of the Strategic Asset Allocation study – Mohan Balachandran.
NOTE: The Board of Trustees (Board) of the Teacher Retirement System of Texas will not consider or act upon any item before the Committee at this meeting of the Committee. This meeting is not a regular meeting of the Board. However, because the full Committee constitutes a quorum of the Board, the meeting of the Committee is also being posted as a meeting of the Board out of an abundance of caution.
Minutes of the Investment Management Committee
September 20, 2018
The Investment Management Committee of the Board of Trustees of the Teacher Retirement System of Texas met on September 20, 2018, in the boardroom located on the fifth floor of the TRS East Building offices at 1000 Red River Street, Austin, Texas.
Committee Members present: Mr. Joe Colonnetta, Chair Mr. David Corpus Mr. Chris Moss Ms. Dolores Ramirez Other Board Members present: Mr. John Elliott Dr. Greg Gibson Mr. James D. Nance Ms. Nanette Sissney Others present: Brian Guthrie, TRS Steve Huff, Fiduciary Counsel, Reinhart Boerner Van Deuren s.c. Don Green, TRS Steve Voss, Aon Hewitt Carolina de Onis, TRS Mike McCormick, Aon Hewitt Jerry Albright, TRS Mike Comstock, Aon Hewitt Jase Auby, TRS Dr. Keith Brown, Board Investment Advisor Amy Barrett, TRS George Walker, Neuberger Berman James Nield, TRS Lori Holland, Neuberger Berman Eric Lang, TRS Grant Walker, TRS Courtney Villalta, TRS Neil Randall, TRS Heather Traeger, TRS Katherine Farrell, TRS J.B. Daumerie, TRS Michael Pia, TRS Investment Management Committee Chair Mr. Colonnetta called the meeting to order at 1:22 p.m.
1. Call roll of Committee members.
Ms. Farrell called the roll. A quorum was present with Mr. Hollingsworth being absent.
2. Consider the approval of the proposed minutes of the July 26, 2018 committee meeting – Committee Chair
On a motion by Mr. Corpus, seconded by Mr. Moss, the committee voted to approve the proposed minutes for the July 26, 2018, Investment Management Committee meeting as presented.
3. Strategic Partnership and the Future of Asset Management– George Walker, Chairman and Chief Executive Officer of Neuberger Berman.
Mr. George Walker discussed the strategic partnership and the future of asset management. He explained major factors that have made their firm successful. These included: the commitment from all levels of the organization, the level of trust, level of transparency, level of engagement, and the expertise of the organization.
Mr. Walker provided an overview regarding the rise of big data and its impact on the asset management industry.
Mr. Walker explained the changing role of private equity in regards to equity, credit, and active engagement with the management team
4. CIO Update and discussion regarding the lease of certain real property located in downtown Austin for additional TRS office space – Jerry Albright.
Mr. Jerry Albright provided an overview of what the Investment Management Division (IMD) was focusing on. He said they have spent time with the executive management in scaling and spacing out for future hiring. He stated that their main components for the fleet consist of fee saving, cost reductions, being efficient and increasing their dedicated operations support. Mr. Albright referenced the possible leasing of future office space. Mr. Guthrie noted if the Committee wished to discuss the specific terms an executive session would be warranted.
5. Discuss the Second Quarter 2018 Performance Review – Steve Voss, Mike McCormick and Mike Comstock, Aon Hewitt.
Mr. Mike Comstock provided a brief market update. He noted real estate and energy prices appreciated. He also noted during the second quarter, the U.S. dollar was stronger and the U.S. equities did better than non-U.S. He stated the asset allocation is in line with the policy. He said there were some modest overweight and underweights that helped the portfolio. However, for the second quarter, he reported the fund missed its performance benchmark by 0.4.
.
Mr. Mike McCormick reviewed the performance attribution. He reported the plan was up 9.2 percent for the trailing one year, compared to 8.5 for the benchmark. He said it was the real asset class that drove the overperformance by 69 basis points.
6. Market Update – Jase Auby.
Mr. Jase Auby discussed the semi-annual market update. He stated that the first half of the year was driven by increased volatility in the markets and the developments of more awareness on the part the markets. He stated that the market may turn into a period of weakness because the Federal Reserve has continued to tighten which could cause a move into a late cycle.
Mr. Auby provided an update on inflation and how it is affecting the market and the Trust asset allocation. He said the U.S. is still in a green zone, indicating that the equities are doing well. He stated that the Eurozone has transitioned to a period of weakness and may potentially earn lower equity returns. He noted over the past 118 years, there were only three episodes of high inflation, two caused by world wars. Mr. Auby reviewed the topic of recession and stated that the U.S. is likely not in danger of recession at this time.
7. Annual Review of the Public and Private Strategic Partnership Network – Michael Pia, Courtney Villalta and J.B. Daumerie.
Mr. Michael Pia reviewed the Public and Private Strategic Partnership Network. He stated that the strategic partnerships are functioning at a high level, serving the Trust well. He noted the strategic partner assets represent 9 percent of the Trust.
Mr. J.B. Daumerie discussed the public portfolio.
Ms. Courtney Villalta provided additional insights on the private portfolio.
8. Semi-Annual Risk Report – James Nield.
Mr. James Nield presented the semi-annul risk report. He reviewed eight key risk metrics and stated that the value at risk for asset allocation has remained stable. He said tracking errors increased slightly, leverage and liquidity remained stable, and counter-party risk improved. He stated that everything is in compliance and there were no issues to address.
Mr. Nield addressed the current VaR estimate of the Trust which is 6.3 percent. He also addressed derivatives and their gross notional. He stated that they have generally seen a declining trend but they did see a slight uptick over the past two quarters. He stated that there is 27 billion in gross derivatives.
9. Consider recommending to the Board an investment in a core property index fund including consideration of a finding that deliberating or conferring on investment transactions or potential investment transactions in an open meeting would have a detrimental effect on the position of the retirement system in negotiations with a third person or put the retirement system at a competitive disadvantage in the market — Eric Lang and Grant Walker.
On a motion by Mr. Moss, seconded by Ms. Ramirez, the committee voted to that the deliberating or conferring on investment transactions or potential investment transactions in an open meeting would have a detrimental effect on the position of the retirement system in negotiations with a third person or put the retirement system at a competitive disadvantage in the market.
At 3:21 p.m., Mr. Colonnetta announced, without objection that the committee would recess to go into executive session for Agenda Item 4 under Sections 551.072 and 551.071 to discuss the leasing certain real estate property and to seek the advice of legal counsel as needed. And also for
Agenda Item 9 under Sections 825.3011 and 551.071 to discuss an investment in a core property index fund to seek the advice of counsel as needed.
At 4:54 p.m. the committee reconvened in open meeting.
On a motion by Mr. Moss, seconded by Mr. Corpus, the committee voted to recommend to the Board the consideration on an investment in core property index fund, as presented. Without further discussion, the meeting adjourned at 3:55 p.m. APPROVED BY THE INVESTMENT MANAGEMENT COMMITTEE OF THE BOARD OF TRUSTEES OF THE TEACHER RETIREMENT SYSTEM OF TEXAS ON THE 13th DAY OF DECEMBER 2018.
______________________________ _________________ Katherine H. Farrell Date Secretary of the TRS Board of Trustees
Chief Investment Officer Update
Jerry Albright, Chief Investment OfficerDecember 2018
2
CIO Update
Trust Value is $153 billion as of Q3 2018
• Fleet Strategyo Developed metrics to assess progress of strategy execution
o Launched internal US Small Mid Cap portfolio
o 32 planned Fleet hires in FY2019; 10 offers accepted and/or extended to date
Planning for an additional 22 Fleet hires spaced throughout the year
4 current vacancies
o Increased operational efficiencies
Enhanced Custody launched
Internal trading cost savings
o Implemented asset allocation leverage and advisor/consultant contracts
• Talent Managemento Instituted “Meet the CIO” sessions with new hires
o Conducting group-level fireside chats across division
o Onboarded Talent Acquisition professional focused on IMD
o Building relationships with underrepresented universities
o Hired recruiter to assist with Private Markets
• IMD Award Nominationso Institutional Investors Allocator’s Choice Awards: “Change Maker of
the Year”
o CIO Magazine Innovation Awards: “Public Defined Benefit Plan Above $100 Billion” and “Collaboration”
• Key Dates & Upcoming Eventso State Street Bank Visit (Boston), December 20, 2018
o TRS Emerging Manager Conference (Austin), February 7, 2019
o IMD Town Hall (Austin), February 14, 2019
o PPI (Los Angeles), February 27-March 1, 2019
o TRS Hedge Fund Conference (Austin), February 28, 2019
o CII Spring Semi-Annual Meeting (D.C.), March 5-7, 2019
• February Board Meetingo CIO Update
o IMD Market Update
o Annual update from the Emerging Managers Program
o Annual update on IMD Operations Group
o SAA Study Education Session
General IMD Update Upcoming IMD Items
Source: Trust value from State Street as of 9/30/2018. Fleet metrics as of 11/12/2018.
3
Metrics Reporting
Metric Objective Annual Target Q1 Q2 Q3
Total Trust Excess Return
Return in excess of the benchmark return for the Total Trust 100 bp 3 Yr: 65 bps 3 Yr: 60 bps 3 Yr: 64 bps
Public Equity Allocation Percent of internal public equity allocation 55% 55% 57% 56%
Active Public Markets Excess
Return
Return in excess of the benchmark return for Active Public Markets investments 100 bp 6mo: 23 bps 9mo: -10 bps 1yr: 21 bps
Principal Investments
Percent of portfolio capital plan in principal investments approved (cumulative quarter-over-quarter)
33% 6% 27% 35%
Private Markets Excess Return
Return in excess of the benchmark return for Private Markets investments 155 bp 3 Yr: 170 bps 3 Yr: 174 bps 3 Yr: 179 bps
Net Fee Savings External manager fee savings $53M To be reported at April 2019 Board Meeting
Source: Performance sourced from State Street as of 9/30/2018. Principal investment approvals estimated by TRS IMD. Public equity allocation excludes SPN.
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
Nothing in this document should be construed as legal or investment advice. Please consult with your independent professional for any such advice. To protect the confidential and proprietary information included in this material, it may not be disclosed or provided to any third parties without the approval of Aon Hewitt.
Teacher Retirement System of TexasPerformance Review: Third Quarter 2018
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Summary
Several economic themes continued to play out through the third quarter including solid fundamentals for US GDP and earnings growth which was offset by slowing European economic activity and declines in emerging market equity partly due to falling currencies; fixed income markets were again negatively impacted by rising rates in the U.S.
Against this challenging environment, TRS returned 2.2% for the quarter which was 0.2 percentage points above its benchmark− Manager value add within Non-US Equity, Directional Hedge Funds, and Energy & Natural Resources more than offset the
negative impacts from active management and an underweight positioning in Total USA
For the trailing twelve months, TRS returned 7.4% versus the benchmark return of 6.8%− Manager value add within Non-US Developed and Real Assets more than offset negative impacts from active management
and underweight positioning in Total USA
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1. Market Summary – Third Quarter 2018
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2. Market Value Change
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3. Asset Allocation DetailMarket Value ($ in millions)as of 9/30/2018 Interim
PolicyTarget
RelativeAllocation
toInterimPolicy Target
Long TermPolicy Target
Long TermPolicy
Ranges($) (%)Total Fund $153,126 100% --- 100.0% --Total U.S.A. $25,663 16.8% 18.4% -1.7% 18.0 13-23%Non-U.S. Developed $20,474 13.4% 13.4% -0.1% 13.0 8-18%Emerging Markets $13,710 9.0% 9.4% -0.5% 9.0 4-14%Directional Hedge Funds $6,136 4.0% 4.0% +0.0% 4.0 0-10%Private Equity $21,312 13.9% 13.2% +0.7% 13.0 8-18%Global Equity $87,296 57.0% 58.5% -1.5% 57.0 50-64%Long Treasuries $15,884 10.4% 11.4% -1.1% 11.0 0-20%Stable Value Hedge Funds $6,652 4.3% 4.0% +0.3% 4.0 0-10%Absolute Return (including OAR) $4,032 2.6% 0.0% +2.6% 0.0 0-20%Cash $517 0.3% 1.0% -0.7% 1.0 0-5%Stable Value $27,086 17.7% 16.4% +1.3% 16.0 11-21%TIPS $4,736 3.1% 3.4% -0.3% 3.0 0-8%Real Assets $18,324 12.0% 11.8% +0.2% 14.0 9-19%Energy, Natural Resource and Inf. $7,910 5.2% 4.9% +0.3% 5.0 0-10%Commodities $98 0.1% 0.0% +0.1% 0.0 0-5%Real Return $31,068 20.3% 20.1% +0.2% 22.0 17-27%Risk Parity $7,677 5.0% 5.0% +0.0% 5.0 0-10%Risk Parity $7,677 5.0% 5.0% +0.0% 5.0 0-10%
Note: Asset allocation information shown above is based upon PureView reporting. The excess returns shown above may not be a perfect difference between the actual and benchmark returns due entirely to rounding.
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4. Total TRS Performance Ending 9/30/2018
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5. Total Fund Attribution – One Quarter Ending 9/30/2018
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5. Total Fund Attribution – One Year Ending 9/30/2018
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6. Risk Profile: Total Fund Risk-Return vs. Peers
Note: Public Plan peer group composed of 30 and 29 public funds with total assets in excess of $10B as of 9/30/2018 respectively for the periods above. An exhibit outlining the asset allocation of the peer portfolios is provided in the appendix of this report.
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6. Risk Profile: Trailing 3-Year and 5-Year Risk Metrics Peer Comparison
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7. Global Equity: Performance Summary Ending 9/30/2018
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Third Quarter YTD One Year Three YearsTotal Global Equity 3.6% 4.3% 9.5% 12.1%Global Equity Benchmark 3.4 4.2 9.6 12.5Difference +0.2 +0.1 -0.1 -0.4Total U.S. Equity 6.5 9.3 15.5 15.5Total U.S. Equity Benchmark 7.1 10.6 17.7 17.1Difference -0.6 -1.3 -2.2 -1.6Non-U.S. Equity 1.0 -3.2 2.3 10.5Non-U.S. Benchmark 0.3 -4.1 1.3 10.7Difference +0.7 +0.9 +1.0 -0.2Non-U.S. Developed 2.1 -0.4 4.1 8.8MSCI EAFE + Canada 1.3 -1.5 2.7 9.3Difference +0.8 +1.1 +1.4 -0.5
Emerging Markets -0.6 -7.1 -0.3 12.9MSCI Emerging Markets -1.1 -7.7 -0.8 12.4
Difference +0.5 +0.6 +0.5 +0.5
Five Years
8.9%8.8
+0.1
11.713.6
-1.9
4.94.1
+0.8
5.54.2
+1.3
4.2
3.6
+0.6
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7. Global Equity: Performance Summary Ending 9/30/2018 (cont’d)Third Quarter YTD One Year Three Years Five Years
Directional Hedge Funds 1.3% 2.3% 4.3% 4.4% 3.8%
HFRI Fund of Funds Composite Index 0.2 0.9 3.0 3.3 3.2
Difference +1.1 +1.4 +1.3 +1.1 +0.6
Total Public Equity 3.2 2.1 7.6 12.0 7.6
Public Equity Benchmark 3.0 2.2 7.9 12.7 7.9
Difference +0.2 -0.1 -0.3 -0.7 -0.3
Total Private Equity 4.9 12.0 16.1 12.0 14.1
Private Equity Benchmark 4.7 11.3 15.3 11.2 12.2
Difference +0.2 +0.7 +0.8 +0.8 +1.9
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
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8. Stable Value: Performance Summary Ending 9/30/2018Third Quarter YTD One Year Three Years
Total Stable Value -1.3% -2.1% 0.1% 3.1%
Total Stable Value Benchmark -1.8 -3.4 -1.5 1.3
Difference +0.5 +1.3 +1.6 +1.8
Long Treasuries -2.8 -5.6 -3.3 1.2
Treasury Benchmark -2.9 -5.8 -3.6 0.7
Difference +0.1 +0.2 +0.3 +0.5
Stable Value Hedge Funds 1.2 3.7 5.8 5.4
Hedge Funds Benchmark 0.8 2.4 3.6 2.8
Difference +0.4 +1.3 +2.2 +2.6
Other Absolute Return 1.2 4.1 6.3 6.6
Other Absolute Return Benchmark 1.1 3.2 4.1 3.3
Difference +0.1 +0.9 +2.2 +3.3
Cash Equivalents 0.3 1.9 2.9 1.8
Cash Benchmark 0.5 1.3 1.6 0.8Difference -0.2 +0.6 +1.3 +1.0
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Five Years
5.8%4.0
+1.8
5.0
4.4
+0.6
5.6
2.9
+2.7
10.9
2.9
+8.0
2.70.5
+2.2
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9. Real Return: Performance Summary Ending 9/30/2018Third Quarter YTD One Year Three Years Five Years
Total Real Return 1.6% 6.3% 8.7% 9.0% 8.7%
Real Return Benchmark 1.4 4.7 6.5 6.9 7.2
Difference +0.2 +1.6 +2.2 +2.1 +1.5
TIPS -0.8 -0.8 0.5 2.2 1.5
U.S. TIPS Benchmark -0.8 -0.8 0.4 2.0 1.4
Difference +0.0 +0.0 +0.1 +0.2 +0.1
Real Assets 1.8 7.8 10.6 11.4 12.2
Real Asset Benchmark 1.8 5.7 7.5 8.4 10.0
Difference +0.0 +2.1 +3.1 +3.0 +2.2
Energy, Natural Resource and Infrastructure 2.9 7.9 10.2 -- --
Energy and Natural Resources Benchmark 1.9 6.6 9.5 -- --
Difference +1.0 +1.3 +0.7 -- --
Commodities 7.9 26.7 28.6 24.3 -5.5
Commodities Benchmark 1.3 11.8 22.9 3.2 -10.0
Difference +6.6 +14.9 +5.7 +21.1 +4.5
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
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10. Risk Parity: Performance Summary Ending 9/30/2018Third Quarter YTD One Year Three Years
Total Risk Parity 0.0% -0.5% 5.1% 9.1%
Risk Parity Benchmark -0.1 -1.1 3.6 7.8
Difference +0.1 +0.6 +1.5 +1.3
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Five Years
6.0%
4.3
+1.7
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Appendix – Supplemental Reporting
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TRS Commitment Levels vs. Peers (>$10 Billion) as of 9/30/2018
Note: The Public Plan peer universe had 31 observations for the third quarter 2018. TRS allocations may not sum to 100.0% which is entirely due to the impact of rounding
The chart below depicts the asset allocation of peer public funds with assets greater than $10 billion.
− The ends of each line represent the 95th and 5th percentile of exposures, the middle light blue and grey lines represent the 25th and 75th percentile of exposures, the purple square represents the median, and the green dot represents TRS exposure.
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Historical Excess Performance Ending 9/30/2018
Quarterly and Cumulative Excess Performance Total Fund vs. Total Fund Benchmark
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TRS Asset Growth
-10
10
30
50
70
90
110
130
150
170
Mar
ket V
alue
(Billi
ons)Total Fund Historical Growth (September 1997 - September 2018)
$153.1
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External Manager Program: Public Equity Performance as of 9/30/2018
Allocation ($ in billions)
ThirdQuarter YTD One
YearEP Total Global Equity $29.7 1.8% 0.4% 5.5%EP Global Equity Benchmark -- 2.2 0.8 6.1Difference -- -0.4 -0.4 -0.6EP U.S.A. $5.6 5.9 10.4 15.6EP U.S.A. Benchmark -- 7.1 10.6 17.7Difference -- -1.2 -0.2 -2.1EP Non-U.S. Developed $4.9 0.9 -1.8 3.0MSCI EAFE + Canada Index -- 1.3 -1.5 2.7Difference -- -0.4 -0.3 +0.3EP Emerging Markets $6.4 -2.1 -8.8 -2.0MSCI Emerging Markets Index -- -1.1 -7.7 -0.8Difference -- -1.0 -1.1 -1.2EP World Equity $6.6 4.1 3.4 9.3EP World Equity Benchmark -- 4.4 4.1 10.1Difference -- -0.3 -0.7 -0.8EP Directional Hedge Funds $6.1 1.3 2.3 4.3HFRI Fund of Funds Composite Index -- 0.2 0.9 3.0Difference -- +1.1 +1.4 +1.3
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Three Years11.5%11.5+0.015.717.1-1.49.99.3
+0.612.512.4+0.113.713.8-0.14.43.3
+1.1
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External Manager Program: Stable Value/Total Program Performance as of 9/30/2018
Allocation ($ in billions)
ThirdQuarter YTD One Year Three
Years
EP Total Stable Value $6.7 1.2% 3.7% 5.8% 5.5%
EP Stable Value Benchmark -- 0.8 2.4 3.6 2.8
Difference -- +0.4 +1.3 +2.2 +2.7
EP Stable Value Hedge Funds $6.7 1.2 3.7 5.8 5.4
EP Stable Value Hedge Funds Benchmark -- 0.8 2.4 3.6 2.8
Difference -- +0.4 +1.3 +2.2 +2.6
Total External Public Program $36.4 1.7 1.0 5.6 10.5
EP External Public Benchmark -- 2.0 1.1 5.7 10.2
Difference -- -0.3 -0.1 -0.1 +0.3
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
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Public Strategic Partnership Program (SPN): Performance Summary as of 9/30/2018
The Public SPNs in aggregate outperformed the benchmark during the first quarter and also over the trailing one and three-year periods.
Allocation ($ in billions)
ThirdQuarter
YTD OneYear
Three Years
Public Strategic Partnership $8.2 1.6% 0.7% 5.6% 10.2%Public SPN Benchmark -- 1.8% 1.0% 5.7% 9.9%
Difference -- -0.2 -0.3 -0.1 +0.3
Blackrock $2.1 2.4% 2.7% 8.4% 11.5%J.P. Morgan $2.2 1.6% -0.9% 4.0% 10.0%Neuberger Berman $2.0 1.5% 0.3% 4.9% 10.1%Morgan Stanley $2.0 0.9% 0.8% 5.1% 9.1%
Note: The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
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Total Fund Performance Benchmark – 18.4% MSCI U.S.A. IMI, 13.4% MSCI EAFE plus Canada Index, 9.4% MSCI Emerging Markets Index, 4.0% HFRI FoF Composite Index, 13.2% State Street Private Equity Index (1 quarter lagged), 11.4% Blmb. Barc. Long Term Treasury Index, 4.0% HFRI FoF Conservative Index, 1.0% Citigroup 3 Mo. T-Bill Index, 3.4% Blmb. Barc. U.S. TIPS Index, 11.8% NCREIF ODCE Index (1 quarter lagged), 4.9% Energy and Natural Resources Benchmark, and 5.0% Risk Parity Benchmark
Global Equity Benchmark – 31.5% MSCI U.S.A. IMI, 23.0% MSCI EAFE plus Canada Index, 16.1% MSCI Emerging Markets Index, 6.8% HFRI FoF Composite Index, and 22.6% State Street Private Equity Index (1 quarter lagged)– TF U.S. Equity Benchmark - MSCI U.S.A. Investable Markets Index (IMI)– Emerging Markets Equity Benchmark – MSCI Emerging Markets Index– Non-US Developed Equity Benchmark– MSCI EAFE + Canada Index– Directional Hedge Funds – HFRI Fund of Funds (FoF) Composite Index– Private Equity Benchmark - State Street Private Equity Index (1 quarter lagged)
Benchmarks
Note: Returns and market values (based on account level) reported are provided by State Street. Net additions/withdrawals are reported on a gross (adjusted for expenses) total fund level as provided by State Street. All rates of return for time periods greater than one year are annualized. The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
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Benchmarks (cont’d)
Stable Value Benchmark – 69.6% Blmb. Barc. Long Term Treasury Index, 24.4% HFRI FoF Conservative Index, and 6.1% Citigroup 3 mo. T-Bill.– US Treasuries Benchmark – Bloomberg Barclays Long Term Treasury Index– Stable Value Hedge Funds – HFRI Fund of Funds (FoF) Conservative Index– Other Absolute Return Benchmark - 3 Mo. LIBOR + 2%– Cash Benchmark - Citigroup 3 Mo. Treasury Bill Index
Real Return Benchmark – 58.7% NCREIF ODCE Index, 17.0% Blmb. Barc. U.S. TIPS Index, and 24.3% Energy & Natural Resources Benchmark– Real Assets Benchmark – NCREIF ODCE Index (1 quarter lagged) – US TIPS Benchmark – Bloomberg Barclays U.S. TIPS Index– Energy and Natural Resources Benchmark – 75% Cambridge Associates Natural Resources Index (reweighted) and 25%
quarterly Seasonally-Adjusted Consumer Price Index (1 quarter lagged) – Commodities Benchmark – Goldman Sachs Commodity Index
Note: Returns and market values (based on account level) reported are provided by State Street. Net additions/withdrawals are reported on a gross (adjusted for expenses) total fund level as provided by State Street. All rates of return for time periods greater than one year are annualized. The excess returns shown in this presentation may differ from State Street statements due entirely to rounding. These differences are generally within a few basis points and are not material.
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 25
Description of Performance Attribution A measure of the source of the deviation of a fund's performance from that of its policy benchmark. Each bar on the attribution
graph represents the contribution made by the asset class to the total difference in performance. A positive value for a component indicates a positive contribution to the aggregate relative performance. A negative value indicates a detrimental impact. Themagnitude of each component's contribution is a function of (1) the performance of the component relative to its benchmark, and (2) the weight (beginning of period) of the component in the aggregate.
The individual Asset Class effect, also called Selection Effect, is calculated as Actual Weight of Asset Class x (Actual Asset Class Return – Asset Class Benchmark Return)
The bar labeled Allocation Effect illustrates the effect that a Total Fund's asset allocation has on its relative performance. Allocation Effect calculation = (Asset Class Benchmark Return –Total Benchmark Return) x (Actual Weight of Asset Class –Target Policy Weight of Asset Class).
The bar labeled Other is a combination of Cash Flow Effect and Benchmark Effect:– Cash Flow Effect describes the impact of asset movements on the Total Fund results. Cash Flow Effect calculation = (Total
Fund Actual Return – Total Fund Policy Return) – Current Selection Effect – Current Allocation Effect– Benchmark Effect results from the weighted average return of the asset classes' benchmarks being different from the Total
Funds’ policy benchmark return. Benchmark Effect calculation = Total Fund Policy Return – (Asset Class Benchmark Return x Target Policy Weight of Asset Class)
Cumulative EffectCumulative Effect calculation = Current Effect t *(1+Cumulative Total Fund Actual Return t-1) +Cumulative Effect t-1*(1+Total Fund Benchmark Return t)
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 26
Disclaimers and Notes
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 27
Disclaimers and Notes
Disclaimers:
Please review this report and notify Aon Hewitt Investment Consulting (AHIC) with any issues or questions you may have with respect to investment performance or any other matter set forth herein.
The client portfolio data presented in this report have been obtained from the custodian. AHIC has compared this information to the investment managers’ reported returns and believes the information to be accurate. AHIC has not conducted additional audits and cannot warrant its accuracy or completeness. This document is not intended to provide, and shall not be relied upon for, accounting and legal or tax advice.
Refer to Hedge Fund Research, Inc. www.hedgefundresearch.com for more information on HFR indices
Notes:
The rates of return contained in this report are shown on an after-fees basis unless otherwise noted. They are geometric and time weighted. Returns for periods longer than one year are annualized.
Universe percentiles are based upon an ordering system in which 1 is the best ranking and 100 is the worst ranking.
Due to rounding throughout the report, percentage totals displayed may not sum up to 100.0%. Additionally, individual fund totalsin dollar terms may not sum up to the plan totals.
Proprietary & Confidential Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 28
Legal Disclosures and Disclaimers
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc. (“AHIC”). The information contained herein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto.
This document is not intended to provide, and shall not be relied upon for, accounting, legal or tax advice or investment recommendations. Any accounting, legal, or taxation position described in this presentation is a general statement and shall only be used as a guide. It does not constitute accounting, legal, and tax advice and is based on AHIC’s understanding of current laws and interpretation.
This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon AHIC’s preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. AHIC disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. AHIC. reserves all rights to the content of this document. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of AHIC.
© Aon plc 2018. All rights reserved.
Trading Annual ReviewBernie Bozzelli, Senior Managing DirectorDecember 2018
2
Agenda
I. Mandate
II. Team Profile
III. Who We Serve
IV. Trading Partner Network
V. Trading Activity
VI. Equity Trading Performance
3
Trading Mandate
Implementation
• Total Trust Execution: Global execution across multiple asset classes totaled $212 billion over past 12 months
• Network: Manage a global network of 46 brokerage firms
• Outperformance: Outperformed the median equity trading desk by 5.8 basis points over past 12 months
Index Management
• Index Portfolio: Manage approximately $4.2 billion in U.S., EAFE+Canada, and Emerging Markets Passive EquityPortfolios
• Full Replication: Benchmark indices are fully replicated in the portfolio in real-time to achieve tight tracking error and in-line performance
Market Intelligence
• Collaboration: Collaborate across the IMD to provide implementation solutions
• Committee: Co-Chair IMD Management Committee
For year ended September 30, 2018Source: TRS IMD
4
Demetrius PopeSenior Investment ManagerGlobal Equity - EuropeBBA, Sam Houston11 years TRS17 years experience
Don StanleyAssociateGlobal Equity - Asia BBA, UT Austin5 years TRS10 years experience
Sean Letcher, CFAInvestment ManagerUS Equity and Futures BS, Business, Texas A & M6 years TRS11 years experience
Jaime LlanoDirectorFutures and Currency MBA, Finance, St. Edwards 13 years TRS19 years experience
Trading Group
Bernie Bozzelli, CFASenior Managing DirectorMPA, Accounting, UT Austin23 years TRS
Pat BarkerSenior Trading Analyst29 years TRS41 years experience2 time Golden Apple Award winner
Steve PetersonSenior Investment ManagerUS Equity MBA, California Lutheran University10 years TRS23 years experience
Paige DouthitAdministrative AssistantTeam Support4 years TRS9 years experience
2 MBAs2 CFAs
1 Masters of Accounting19 Years Average Experience
5
Who We Serve Cross-Divisional Collaboration
TradingPrivate Markets
Multi-AssetStrategies
Internal Fundamental
• Stock DistributionLiquidation Strategies
• FX Hedging
ForeignExchange$44.4 billion
traded
Transactions in public markets with customized implementation
strategies across profit centers
Value Creation for TRS
MembersRisk
• Risk Parity • Low-Vol Equity
• Alternative Risk Premia• Quantitative Equity• Special Opportunities
• Fundamental Equity• Corporate Action analysis• Alpha Opportunities
• Transition Management
Equities$67.7 billion
traded
Futures/Derivatives$100.3 billion
traded
External PublicMarkets
For year ended September 30, 2018Source: TRS IMD
6
Trading Partner NetworkAs of September 30, 2018
4 Firms• Deliver focused and high capacity global relationships across all asset classes• Highly integrated with TRS trading, risk management, administrative systems, etc.• Leading providers of investment services – TRS is a preferred client, receiving the
highest level of service available
5 Firms• Well established firms with overall world class global services capabilities• World renowned for research and technology• Best-of-breed product process development
29 Firms• Includes firms who have a specialty in finding liquidity for hard-to-trade names or
firms who have a niche in electronic trading• Firms who have a core competency of trading internationally in particular regions
are also included
8 Firms• All newly approved firms doing business with TRS
Premier (40-60%)3-5 Firms
Core (20-30%)5-10 Firms
Execution (20-30%)15-30 Firms
Pilot(1-10%)
5-10Firms
7
Trading Activity
$79.1Quant
$65.4Risk Parity
$25.5Transition
$13.4Fundamental
$11.4Trust Rebalance
$10.6Private Markets
$6.7Passive
Total Notional Traded By Strategy($, billions)
Citigroup$25.1
JPMorgan$24.2
Goldman Sachs$17.3
Morgan Stanley$14.9
UBS$16.2Barclays $14.7
Deutsche Bank $13.1
Credit Suisse $11.8
Merrill Lynch/BofA$3.8
Remaining Execution (28 firms) $35.1
Quantitative Brokers$17.6
Societe Generale$11.3
BNP $4.0 Pilot (7 firms) $3.0
Total Notional Traded by Broker($, billions)
For year ended September 30, 2018Source: TRS IMD
8
Equity Trading Performance
• TRS has outperformed the median peer universe in 9 of the last 10 years.
• Trading retained $370 million of TRS alpha over this time.
• TRS equity execution is measured against the ITG peer universe of institutional investors. The median performance of our peer universe is our benchmark.
Source: ITG/Plexus Post Trade Ace
TRS Trading Performancevs. Peer
BenchmarkQuartile Ranking
2018 + 6 bp 2nd2017 + 3 2nd2016 + 6 2nd2015 + 8 1st2014 0 2nd2013 + 11 1st2012 + 10 1st2011 + 2 2nd2010 + 27 1st2009 + 15 1st
Target + 8 bp 1st
Year
End
ed S
ept 3
0th
APPENDIX
10
Broker Certification Process
Phase 1 - Certification Process for New Firms
Procedures for New Firms• Broker qualifications
questionnaire• Minimum standard
requirements
Evaluation Period• 6 to 18 month process• Identify valued services• Transaction cost analysis
review• Recommendations• Category fit
Annual Review• Adds/Deletions• Promotions/Demotions• Qualitative review• On-Site visit
Certification Process• Senior management review
If acceptable, then …Phase 2 - Broker added to Pilot Program
Pilot Program• Pilot brokers evaluated
quarterly using same criteria as all TRS brokers
Quarterly Review Process• Trader vote• Transaction cost analysis• Quarterly report card to
each broker
Two Year Process• Pilot brokers have up to a 2
year evaluation process to qualify for advancement toexecution category
Completion of Pilot Program• Advance to execution /core
category or remove from broker list
• Broker has opportunity toadvance based on performance after 1 year
11
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12
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Risk Management and StrategiesJames Nield, Chief Risk OfficerDecember 2018
2
Executive Summary
Battle plans producing innovations
Risk Mandate: Enable efficient risk usage
Strong performance from Risk Strategies+159 bp 1-year alpha; +132 bp 3-year alpha
Risk helping to build the fleetSAA and IMD Group risk reports are 2019 priorities
3
Risk Management and Strategies Group
James Nield, CFA, FRMChief Risk OfficerMBA, Finance, New York UniversityBS, Finance, Pennsylvania State University
Mark Telschow, CFASenior Investment ManagerBS, Civil Engineering, University of Texas
Mike Simmons, CFA Investment ManagerMPA, Accounting, University of TexasBBA, Finance,Texas A&M University
Steven LambertSenior AssociateBS, Business Management,Saint Joseph’s College
Stephen Kim State Street EmployeeMBA, Finance, University of TexasBS, Computer Science,Dartmouth College
Paul WaclawskyJunior AnalystBS, Accounting,University of Maryland
Elona RikaAssociatePhD Economics & Finance,Brandeis University
Pierre PfarrAnalystBA, Economics,University of Texas
4Advanced
degrees, three CFAs, one FRM
9Years of average
investment experience
2Fleet hires planned in
2019
4
Mandate: Enable efficient risk usage
Risk Management
Risk Strategies
Identify Prepare Act
Live
RP
Risk Parity
TI
Tilts
LV
Low Vol
TR
RP Trend
MR
Mean Rev
RE
Reinsurance
Paper Closed
FX$
Dynamic FX
informing
5
Deep dive into 20 plus topics:
Trust Profile: Absolute risk, relative risk, counterparty, currency, derivatives, leverage, liquidity...
Macro Risks: Bear market indicators, bubble signals, country risk, valuations...
Portfolio Risks: Performance signals, Hedge Fund profile, manager certifications...
Redesigned Risk Monthly reportRisk Management
6
Risk Monthly currently shows late cycle conditions existRisk Management
Cycle Risk Management is informing new Risk
Strategies
Internal scorecard monitors late cycle
conditions
Report currently indicates heightened
concerns about late cycle
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
76 79 82 85 88 91 94 97 00 03 06 09 12 15 18
Spending Unsustainable Pushing Capacity Market Indicators
Source: TRS IMD; as of September 30, 2018
7
Battle Plan ready for deploymentRisk Management
Battle Plans provided to IMD Management
Committee twice a year
Formulated Battle Plans for key risks in
Risk Monthly
Goal is to socialize plans to make better
decisions
8
Live
RP
Risk Parity
TI
Tilts
LV
Low Vol
TR
RP Trend
MR
Mean Rev
RE
Reinsurance
Paper Closed
FX$
Dynamic FX
Risk Strategies
9
Assets 1-Year 3-YearPortfolio $, billions Returns Alpha Returns AlphaInternal Risk Parity $4.3 6.7% +309 bp 10.7% +294 bpExternal Risk Parity 3.4 3.5% -14 bp 7.6% -12 bpLow Volatility 4.2 13.4 +211 18.4 +291Reinsurance 0.5 -1.5 -515 0.4 -241Total Risk Strategies $12.4 7.2% +159 bp 9.9% +132 bp
Strong performance from Risk Strategies
4
8%
2
1 portfolio
Source: State Street, TRS IMD; as of September 30, 2018
of Trust AUM
live portfolios
in developmentportfolios
closed
10
TiltsRisk Parity
Risk Strategies: Overview and Innovations
Low Vol Reinsurance
Investing in a diversified portfolio
that uses leverage to target a desired risk
level
Generating equity-like returns with less
market risk by capitalizing on
behavioral biases
Adjusting Risk Parity positions
based on market conditions
Adding a non-correlated return stream to further diversify the Trust
Create passive strategies for Trust
Battle Plan to address dislocations
Add defensive adjustments
Support potential private investments
Overview
Innovations
11
The Internal Risk Parity portfolio seeks balance to growth and inflation factors:
Rising Growth
Falling Growth
Rising Inflation
Falling Inflation
Risk Parity is a diversified portfolio with leverageRisk Strategies
1 23 4
Rising Inflation
Commodities
Inflation Linked Bonds
Rising Growth
Equities
Credit
Base Metals/Energy
Falling Growth
Nominal Bonds
Inflation Linked Bonds
Falling Inflation
Nominal Bonds
Equities
Risk Parity risk profile
Traditional 60/40 portfolio risk profile
Rising Growth
Falling Growth
Rising Inflation
Falling Inflation
0%
5%
10%
Unlevered Volatility
0%
5%
10%
Levered VolatilityUnlevered VolatilitySource: TRS IMD
12
3Further develop existing and potential new portfolios with
an emphasis on cycle management1Collaborative reports
with IMD Groups to better manage risk both at a portfolio and at a Trust level 2
Expect the following in 2019
Strategic Asset Allocation
Risk Strategy Innovations
IMD Group Risk Reports
Provide a Risk Management
perspective to long-term asset allocation
and processes
Multi-Asset Strategies GroupMohan Balachandran, Senior Managing DirectorDecember 2018
2
Multi-Asset Strategies Mandate
Alternative Risk Premia
Special Opportunities
Quantitative Equity
Treasury
Fixed Income
Strategic Asset Allocation
Research & Development
Manage Trust exposures and develop alpha strategies
Alpha Beta Trust
3
4321
Executive Summary: Focus on Innovation
Quantitative Equity
Continual improvement in areas of data systems, signal evaluation and portfolio construction
Significant upsize over the last year
Treasury/Fixed Income Portfolios
Steady outperformance versus benchmark
Improvement in Trust rebalancing procedures utilizing tracking error based methodology
Alternative Risk Premia
TRS recognized as an innovator in ARP investing
ARP upsize plan on track – will double in size over the next year
Special Opportunities
5 year anniversary
Program outperforming funding source and 8% target IRR since inception (12.2% IRR)
Source: State Street, TRS IMD; as of 9/30/2018
4
Mohan Balachandran, PhDSenior Managing DirectorPhD, Physics, Brown University
Wayne Speer, CFASenior Investment ManagerMBA, SMU
Anthony PaoliniAssociateBBA, MPA UT Austin
Shruti SureshContractorMS, StatisticsColumbia University
Solomon GoldInvestment ManagerMS, Economics, UT Austin
Hasim Mardin, FRMSenior AssociateMS, Economics, UT Austin
Jingshan Fu, PhDInvestment ManagerPhD, Demography, Harvard University
ANALYTICS/ RESEARCH
Mark Albert, CFASenior DirectorMBA, University of Michigan
Ashley Baum, CFA, CPASenior Investment ManagerMPA Accounting, UT Austin
Matt Talbert, PhDSenior Investment Manager PhD, Economics, UT Austin
Michael Phillips, CFAInvestment ManagerMA, Music, Cambridge
Christopher White, CFAAssociateMBA, Finance UT Austin
Ryan LearySenior AssociateMBA, Rice University
Paul WaclawskyAnalystBS, AccountingUniversity of Maryland
Eric Morris, CFASenior AssociateMBA, UT Austin
Gabriel Salinas, PhDSenior AssociatePhD, Economics UT Austin
Kyle SchmidtSenior Investment ManagerMBA, SMU
QES Spec OppsARPARP/QES
Jesse HibbardInvestment ManagerBS, Economics, Wharton
Sunny PathakContractorMS, Operations ResearchColumbia University
Multi-Asset Strategies Group
13Average years of
experience
3Fleet Hires
planned by 2020
24Advanced degrees: 13 Masters, 6 CFAs,
4 PhDs, 1 FRM
5
Strong Outperformance across MSG Portfolios
Source: State Street, TRS IMD; as of 9/30/20181 The Quantitative Equity Alpha results are based on the MSCI USA Standard Gross, MSCI EAFE net, and MSCI EM net benchmarks2The Special Opportunities benchmark is a blend of the underlying trust benchmarks weighted by the NAV of the underlying investments against the relevant benchmark (a combination of the Trust’s US equity benchmark and Absolute Return (LIBOR plus 200 bp) benchmark). Historically, the benchmark has also included weighted contributions from the real estate and energy and natural resources benchmarks. 3 Returns on overlay portfolio scaled to 12% volatility on $625MM NAV, equivalent to 5 bp of Trust risk
Multi-Asset Strategies Group
PortfolioTotal Assets Return Alpha
$, bn % Trust 1-Year 3-Year 1-Year 3-Year
Global Equity
Quantitative Equity1 $15.5 10.1% 11.2% 15.1% -9 bp +59 bp
Stable Value
Treasury 14.8 9.7% -3.3% 1.0% +24 bp +27 bp
Special Opportunities2 1.1 0.7% 12.9% 9.2% +695 bp +274 bp
Real Return
TIPS 3.8 2.5% 0.6% 2.3% +16 bp +23 bp
Overlay
Alternative Risk Premia3 0 0% 10.1% 10.1% +1010 bp +1007 bp
Total $35.2 23.0%
6
Alternative Risk Premia
2018 U.S. Institutional Risk Premia Manager of the Year
- EQDerivatives
Extract compensated Risk Premia such as Value, Carry and Momentum across all
asset classes
Program will double in size over the next year
Source: State Street, TRS IMD; as of 9/30/2018
1-Year 3-Year
Alpha (bp) +1010 +1007
Cumulative Value Added ($, millions) $42.8 $99.9
7
ARP: Diversified performance across asset types and strategies
Balanced 3 Year performanceBalanced risk across asset classes
3 Year Strategy Attribution
Commodities, 24%
Equity Indices,
13%
Bonds, 19%
FX, 18%
Equity Names,
27%
-10%
0%
10%
20%
30%
40%
Oct
-15
Dec-
15
Feb-
16
Apr-
16
Jun-
16
Aug-
16
Oct
-16
Dec-
16
Feb-
17
Apr-
17
Jun-
17
Aug-
17
Oct
-17
Dec-
17
Feb-
18
Apr-
18
Jun-
18
Cumulative Performance Since Inception
TRS Peers
12 Month Risk Contribution
Outperformed peer set
Source: State Street, TRS IMD; as of 9/30/2018
Equity Names
Equity Indices Bonds FX Commods Total
Value -1.1% 0.2% 1.7% 1.8% 2.5%Carry 1.5% 1.0% 3.1% 5.7%Momentum 0.5% -0.2% 0.5% -1.1% 1.0% 0.7%Quality 1.3% 1.3%Residual 0.1% 0.0% 0.1% -0.1% 0.1% 0.1%Total 0.7% -0.1% 2.1% 1.4% 6.0% 10.1%
8
Quantitative Equity
Targeting approximately 1/3 of Active Public Equity portfolio
Generate alpha in Public Equities using quantitative
processes
Program has generated 59 bp of alpha over the last 3 years
Total Assets Return Alpha
$, bn % Trust 1-Year 3-Year 1-Year 3-Year
USA1 $9.2 6.0% 17.5% 17.6% -42 bp +50 bp
Non-US Developed 4.6 3.0% 2.8% 9.6% +14 bp +31 bp
Emerging Markets 1.7 1.1% 0.1% 14.3% +88 bp +192 bp
Total Quant Equity $15.5 10.1% 11.2% 15.1% -9 bp +59 bp
Outperformed 173 bp annually since inception
Source: State Street as of 9/30/2018, inception date: June 11, 20091: The USA Alpha results are based on the MSCI USA Standard Gross benchmark
9
Quantitative Equity: Planning for the Future
Quant Equity research effort launched
2007
2009
2012
2015
2016
2018
2019
First Quant Equity portfolios launched
Multi-factor Risk Premiaportfolio launched in
long/short format
Low Volatility USA portfolio launched
Quant Equity external managers best practices study completed
Added Low Vol EAFE and EM portfolios
Implementation of best practices study across
portfolios
10
Special Opportunities: 5 Year Anniversary
1 Inception date is 06/04/12. Formal Special Opportunities program started May 2013. 2 The Special Opportunities benchmark is a blend of the underlying trust benchmarks weighted by the NAV of the underlying investments against the relevant benchmark (a combination of the Trust’s US equity and Absolute Return (LIBOR plus 200bp) benchmark). Historically, the benchmark has included weighted contributions from real estate, energy and natural resources.
Oversee implementation of Tactical Illiquid Credit Allocation
11 manager relationships and $1.8 billion deployed
Access opportunistic investments not targeted in other Trust areas
Source: State Street, TRS IMD; as of 9/30/2018
Since Inception1 Return Alpha2
IRR MOIC 1-Year 3-Year 1-Year 3-Year
Total Special Opportunities 12.2% 1.1x 12.9% 9.2% +695 bp +274 bp
Current Holdings 9.1% 1.1x
Realized Investments 22.3% 1.2x
11
Special Opportunities: Continual Innovation
Executed ~15% of opportunities reviewed
$1.8 billion deployed
$912 million realized
6 fully-realized investments at 22.3% IRR and 1.2x MOIC
Outperformed 8% target IRR by 420 bp annually
Generated profits of $196.8 million since inception
Source: State Street, TRS IMD; as of 9/30/2018
202 Sourced
143 Referred / Diligenced
34 Approved
30 Invested
Since Inception
12
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13
Treasury/Fixed Income
Research & Development in areas of Bond and FX ARP strategies
Delivery of Index returns for the US Treasury portfolio and US TIPS
portfolio, as well as the Risk Parity inflation-linked bond allocation
Manage total Trust asset allocation and capital activity
Total Assets Return Alpha
$, bn % Trust 1-Year 3-Year 1-Year 3-Year
Long Treasuries $14.8 9.7% -3.3% 1.0% +24 bp +27 bp
TIPS 3.8 2.5% -0.6% 2.3% +16 bp +23 bp
Total Treasury $18.6 12.1%
Source: State Street as of 9/30/2018
14
Strategic Asset Allocation (SAA) Study
Asset Allocation Old Policy New Policy (Oct 2014)
Change
Global EquityUSA 20% 18% -2%Non-US Developed 15% 13% -2%Emerging Markets 10% 9% -1%Directional Hedge Funds 5% 4% -1%Private Equity 11% 13% 2%
TOTAL GLOBAL EQUITY 61% 57% -4%
Stable ValueUS Treasuries 13% 11% -2%Absolute Return 0% 0% 0%Stable Value Hedge Funds 4% 4% 0%Cash 1% 1% 0%
TOTAL STABLE VALUE 18% 16% -2%
Real ReturnGlobal Inflation-Linked Bonds 5% 3% -2%Commodities 0% 0% 0%Energy and Natural Resources 3% 3% 0%Real Assets 13% 16% 3%
TOTAL REAL RETURN 21% 22% 1%
Risk Parity 0% 5% 5%
TOTAL TRUST 100% 100% 0%
Allocation changes from 2014 SAA Study
1TRS IMD Estimate
The Trust conducts an SAA study every 5 years to:• Study long-term (10+ years) return forecasts from partners
• Evaluate impact of possible changes to asset allocation
• Report results and recommend changes to the Board
The 2014 SAA Study resulted in changes to the Investment Policy target weights:• 2014 SAA changes created +21 bp (ann.) in excess return1
Goal of the SAA Study is to rigorously evaluate current asset allocation to enable Trust goal of achieving long-term rate of return
15
SAA Research Agenda
SAA best practices in lower return environment
Role for expanded allocation to Private Markets
Use of asset allocation leverage in policy allocation
Role of Hedge Funds in asset allocation
Opportunity cost of illiquidity
Asset allocation implications of opening Chinese markets
Managing currency risk
Alpha expectations
Potential Research Topics
February – Introduction to SAA and present gathered market forecasts
April – Present interim findings
July – Present recommendations and potential policy changes
September – Present final recommendations and related policy changes for Board approval
SAA Process Plan: 2019 Board Meeting Schedule